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How to Value Bonus Payments and Other Benefits in Termination Damages

13-Oct-20

By the McLennan Ross Labour & Employment Group

The recent unanimous decision by the Supreme Court of Canada, Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, clarifies the two-step approach to quantifying common law reasonable notice damages for bonuses and other benefits.

This case gained attention in the employment law world because the Plaintiff asked the Court to consider the scope and effect of a general “duty of good faith and fair dealing” with respect to employees.

At issue in this case was whether David Matthews (the “Plaintiff”) was entitled to receipt of certain Long Term Incentive Plan (“LTIP”) benefits that would have triggered after his termination, but during his common law reasonable notice period.

At trial, the trial judge found that the Plaintiff’s former employer, Ocean Nutrition Canada Limited (“Ocean”), constructively dismissed the Plaintiff and that the Plaintiff was owed a reasonable notice period of 15 months. Under the common law, this means the Plaintiff was entitled to damages equal to everything he would have earned (including wages and incentive payments) if he had remained employed during the 15 month period. The trial judge also held that the Plaintiff would have been a full-time employee when the LTIP triggering event occurred, had he not been constructively dismissed (based on his common law reasonable notice period). He reviewed the terms of the LTIP and determined that nothing in the plan document limited the Plaintiff’s right to be paid the LTIP during the reasonable notice period and awarded damages to the Plaintiff that were equivalent to what he would have received under the LTIP.

On appeal, the Court of Appeal unanimously upheld the decision that the Plaintiff had been constructively dismissed and that the appropriate reasonable notice period was 15 months. However, the majority of the Court of Appeal found that the Plaintiff was not entitled to damages under the LTIP. In the majority’s view, the plain language of the LTIP disentitled the Plaintiff from an incentive payment during his notice period.

On appeal to the Supreme Court of Canada, the parties continued to disagree whether the Plaintiff was entitled to compensation for the lost LTIP payment and also on the basis for awarding those damages — whether as a remedy for failing to provide reasonable notice, failing to act in good faith, or both. The Plaintiff argued that Ocean’s breach of a general overriding duty of good faith and fair dealing had the result of rendering ineffective the terms of the LTIP that the employer said disentitled the Plaintiff from collecting his incentive payment after his termination.

The Supreme Court of Canada had little time for the parties’ confounding legal arguments around what head of damages the LTIP would fall under and the scope and effect of the duty of good faith in contractual dealing. The Supreme Court preferred a much simpler approach. It clarified that the issue was whether there was an LTIP entitlement on the basis of reasonable notice and the terms of the LTIP. The Court did address the allegation of Ocean’s bad faith and dishonest behaviour and clarified that the duty of honest performance, which applies to all contracts (including employment contracts), means simply that parties must not lie to or otherwise knowingly mislead the other party about matters directly linked to the performance of the contract. Further, the Court confirmed that when an employee alleges a breach of the duty to exercise good faith in the manner of dismissal, this means courts are able to examine a period of conduct that is not confined to the exact moment of the termination itself. However, the Court declined to decide whether a general overriding duty of good faith exists during the life of an employment agreement. That question was left to be dealt with another day.

In terms of reasonable notice, the Supreme Court focused on the question of what damages were appropriately due as a result of Ocean’s failure to provide the Plaintiff with reasonable notice. The Supreme Court confirmed that the appropriate two-step approach to reasonable notice damages is to:

  1. consider the employee’s common law rights (i.e., what the employee would have earned or been entitled to during the notice period); and
  2. determine whether there is something that would specifically remove the employee’s common law entitlement. To do this, the wording of the contract or plan must be absolutely clear and unambiguous in its meaning.

In applying the two-step approach to the case at-hand, the Court first found that the Plaintiff was entitled to damages for the lost LTIP payment as part of his common law damages as the triggering event occurred during his reasonable notice period.

In addressing the second step, the Court found that the language of the LTIP requiring an employee to be “full-time” or “active” to be eligible for payment under the plan was insufficient to remove the common law right to damages.

The Court further held that a clause purporting to remove an employee’s common law right to payment upon termination “with or without cause” or a reference to “unlawful termination” would also not suffice to remove the common law right to receive the payment, if the timing of the payout occurred during the reasonable notice period. As a result, the Court held that damages were owing equal to what the Plaintiff would have received under the LTIP.

This decision serves as an affirmation that employers must carefully review and draft bonus and benefit plan documents if the goal is to disentitle an employee to bonus payments payable during a reasonable notice period. Very precise language is required, and we recommend that you get legal advice before finalizing your plan documents.

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